THE ASCENT OF FREE MARKET ECONOMICS

THE ASCENT OF FREE MARKET ECONOMICS: AN ECONOMIC REFORMATION WITH POPULAR SUPPORT?

F. Panizza (Chapter 3)

A Summary 

In a Nutshell

Panizza continues to try to understand how neo-liberal reforms became accepted in LA given that although in the long run they benefit everybody, in the short term there are painful transition costs that fall on specific groups. Lurking behind this analysis is the Olsonian idea that that as the winners from the reforms were diffuse they would not have been able to organize in support of the reforms, whereas as the costs fell on specific groups (often business elites and politicians) who would thus have been able to mobilize (overcome collective action problems) to defeat the reforms. 

1. Electoral Mandate –Presidents of the time were elected with a broad mandate and so could use their authority in this regard to counter opponents and push through reform. Although he concludes there may be elements of truth in this idea, and empirical examples, it is over relied upon as an idea.
2. Institutional settings – this is the executive isolation idea, essentially that Presidents used powers of decree to push through unpopular reform. Again, although there were elements of this again as an argument it is relied upon too much
3. Distributional costs and benefits of the reforms – this is the key to Panizza’s argument. He states that broad support from politicians, elites and the population are needed (in democracies) to ensure firstly that reforms are initiated and secondly that they are persistent. He follows on from Schamis to show that coalitions were formed between politicians and elites that created winners from liberalization. Whereas 1 and 2 focus exclusively on how losers (opponents) were neutralized, this approach show how winners were created (supporters) by liberalization. He follows on from Weyland to show how popular support was won due to the “domain of losses” theory that any amount of pain would be preferable to hyperinflation.

And so the neoclassical model of political economy that puts collective action problems at its heart necessarily relies upon the ideas of executive isolation as it is an essentially negative doctrine (how to neutralize losers). Panizza’s method also looks at how winners were mobilized and so relies less on executive isolation, and more on preferences of key actors and the population. He continues with the theme that the IMF cannot be held (solely) responsible for the adoption of the reforms.

 Presidential Mandate

• If governments are supposed to be broadly responsive to citizen’s preferences then radical reforms should require a clear mandate. Cardoso (Brazil), Zedillo (Mexico) second administrations of Menem (Arg) and Fujimori (Bolivia) are examples where broad mandate was granted.
• However, there were instances where there was “shock reform” i.e. a volte face in favour of liberalization e.g. Fujimori first term. He had been heterodox and campaigned against liberal reforms, but then changed his mind after 10 days in office. This type of shock treatment was the exception rather than the rule according to Panizza.
• Some argue that this type of Fujimori action is the product of a delegative democracy where power is delegated to a presidency and then they may act as they wish without the usual liberal democracy restraints. Panizza argues against this, saying that crisis was an extraordinary event, and once stability resumed relations settled down. The gravity of the crisis in some way demanded shock response. Additionally, he points out that the population did not revolt indicating that support was strong, there was no other option. In that regard it was desperation rather than acceptance of a new ideology, or a belief that the president can act at will. Importantly in Venezuela the shock reforms of Perez were greeted with violence as support was not strong in the populace, in part because the crisis was not nearly as bad.

 Institutional Underpinnings of Reform

• Powerful domestic opponents could be overcome by a highly autonomous executive insulated from sectorial pressures. The tools here were presidential decrees.
• Fujimori is the extreme case – he enacted 120 laws by decree and closed down congress for a time in 1992. It appears he had total control of policy process.
• However, when polled it seems 85% of the population agreed with him suspending congress etc.
• He argues that this underplays two important sources of support. Firstly, societal actors. They were much more central to reform than this statist approach recognizes. Tax, health reforms, pension’s reforms, and the remodeling of the bureaucracy elicited a wide response from various interest groups. Secondly, parliamentary coalition support is needed even when ruling by decree as that power has to be granted, and often, parliament has the power to rescind the law. He builds on Corrales study to say that the success of Menem’s reforms and the failure of Perez’s lay in the conflictive nature of the relationship between the executive and the parliament in the latter case.

 

• The rest of the paper really has already been summarized elsewhere….

 For domestic support he cites: Weyland, end to hyperinflation/macro instability, better consumables for middle classes, falling poverty in early 90s etc.

DELEGATIVE DEMOCRACY

DELEGATIVE DEMOCRACY

G.A. O’Donell

Journal of Democracy, Vol. 5 No. 1, (Jan., 1994) pp. 55-69

A Summary 

In a Nutshell

Although democracies in the then recently transitioned Latin American states was representative (based on popular elections) they were “delegative” rather than truly democratic. This was largely because of crisis both social and economic that they inherited from the authoritarian governments before them which gave rise to certain practices and conceptions about the proper exercise of power.

 The transition to democracy opens up the possibility of a second transition from government to democratic regime. Nothing guarantees that this will happen, but in order for it to do so a set of institutions needs to be built which enable the social and economic problems inherited to be dealt with in a regularized way. Delegative democracies lack these institutions and governmental effectiveness.

 [This argument is very much related to the executive isolation argument examined by Schamis as well as Armijo & Faucher in as much as it posits a policy/reform process characterised by a lack of horizontal accountability, a large electoral mandate and subsequent belief by the president that he has the authority to rule the country by decree at whim.]

 The Importance of Institutions

Institutions are regularized patterns of interaction that are known and accepted by social actors who consider that they will continue to act in the same way for an indefinite time period. The characteristics of a functioning institutional setting include:

1. Institutions that incorporate and exclude – they determine the basis upon which resources, claims etc. are accepted as valid participants in the decision-making and implementation process.
2. Institutions shape the probabilities of outcomes – certain rules fix the range of feasible outcomes and their likelihood within that range e.g. democracy precludes the use of force.
3. Institutions aggregate – the rules lead individuals to make decisions about which level of aggregation of preferences is optimal for them.
4. Institutions induce representation – following on from 3 the aggregation of preferences leads to the transformation of the potentially many voices into only a few that speak for many.
5. Institutions stabilize expectations – leaders and representatives expect a narrow range of possibilities from interactions, and expect that deviations are likely to be counterproductive. It is at this point that an institution is in equilibrium.
6. Institutions lengthen the time-horizons of actors – stabilization of behaviours implies that interactions are set to continue. This together with high levels of representation is the foundation for the “competitive cooperation” that characterises democracy. Thus one shot prisoners dilemmas are overcome by bargaining. The alternative to institutions is a colossal prisoner’s dilemma. 

Characteristics of Delegative Democracy

• Rest on the premise that whoever wins the election may govern as he sees fit as they are the embodiment of the nation. The promises of his campaign need not be met (Menem, Fujimori). They are above organized interests.
• A large majority must be won to sustain such claims, and as such often run-offs are used. The majority is used to sustain the myth of legitimate delegation.
• [This is largely related to neo-populism: presidents campaign on personal charisma, they can restore the health of the nation etc. They and their technical advisers are initially infallible. In terms of policy however they behave in a delegative rather than populist fashion.]
• The president isolates himself political institutions and interests. And this is main difference between DD and representative democracy: in representative there is vertical accountability (between the president and the people) but also horizontal accountability (president accountable across a network of relatively autonomous powers that can call into question and punish if necessary, improper ways of discharging the responsibilities of office. In DDs only the former type of accountability exists. Indeed horizontal accountability is a headache to be avoided for DD presidents. 

Examples

• First democratic government of Uruguay (Sanguinetti) saw the implementation of incremental economic policies, whereby inflation slowly dropped whilst investment and wages slowly rose. Most of the policies were explicitly negotiated within congress and with participation from various interest groups.
• By contrast Argentina (Austral Plan), Brazil (under the Cruzado plan, things were different under the Plan Real) and Peru (Inti Plan) all opted for drastic and surprising stabilization packages. The packages were disastrous [for O’Donell] and solved very few of the problems inherited from the B-A states.
• What is interesting is that Uruguay inherited no less severe problems than did Argentina or Brazil, but it chose an incremental path rather than a shock doctrine. Why is this the case? O’Donell says it is because Uruguay was a case of re-democratization with working institutions of government. The president had to negotiate with congress and congress had to consult various interested parties. Consequently, even though preferences at the top may have been for stabilization [a supposition not backed up with evidence] they were “condemned to incrementalism”, and limited to modest goals.
• “This is the drama of countries bereft of a democratic tradition”.

 [This thesis should be read in conjunction with those pieces that state that executive isolation played only a minor part in many liberalizations. For example the Brazilian Plan Real was negotiated, and evidence of coalition building is seen in many countries indicating that domestic support was important (although it should be conceded that that the coalition building was often extra-institutional) – see Schamis as well as Armijo.]

WHY IS TRADE REFORM SO POPULAR IN LATIN AMERICA?

WHY IS TRADE REFORM SO POPULAR IN LATIN AMERICA? A CONSUMPTION BASED THEORY OF TRADE POLICY PREFERENCES

A. Baker

World Politics 55 (April 2003), 423-55

A Summary 

In a Nutshell

Trade theory generally states that individuals make judgements about trade policy based on retrospective economic evaluations about earning power why is it that when polled Latin Americans consistently believe free trade to be good or somewhat good for the country. Particularly it is much more popular than privatization and this indicates that support of trade is not part of some wider stamp of approval for economic liberalism.

 The Heckscher-Ohlin model predicts that the relatively poor of Latin America should benefit from freer trade as they form the abundant factor: cheap labour. Conversely capitalists, including those with accumulated human capital, should be worse off, as it will be more profitable to import the services of such factors. This has not proved to be the case. Rather free trade has proved disastrous for employment opportunities at the lower end of the job market, the informal sector size increased greatly during the transition period. This may well be because those who are best able to benefit from free trade are those who have high levels of human capital as they have transferable skills and as such are able to adapt better to the shifting configuration of labour demand, and move more flexibly through the market. Thus in regions such as Latin America with large possibly majoritarian populations of undereducated people who have skills that are more specific to a particular sector or type of employment, there should be resistance to free trade policies.

 A retrospective economic evaluation based on earning power by citizens of Latin America should be negative for the majority who have lost out from trade opening. Why then does free trade seem to be so popular?

 The answer could be found in consumption. Most scholars overlook the fact that preferences for free trade could be formed by beliefs about liberalization by observing its impact on prices, quality and availability of goods for consumption. Under ISI citizens were charged extra to protect industry’s inefficiencies, and so once this system is dismantled all else equal there will be beneficial impact on prices for consumers. Thus individuals may be more willing to base their trade preferences on their status as consumers rather than producers of income earners. It could be that the links between trade liberalization and employment/wage variability are not obvious to those directly affected. Additionally everyone in the country is a consumer but not all are producers, meaning that trade preferences will be better tracked by trends in consumption rather than production.

GLOBALISATION AND THE PERCEPTION OF AMERICAN WORKERS

GLOBALISATION AND THE PERCEPTION OF AMERICAN WORKERS

Sheve and Slaughter

Chapter 3: Cleavages in Public Preferences about Globalisation

 A Summary

In a Nutshell

The authors seek to predict who might oppose measures to open up trade based on the assumptions that individuals are self-interested, that individual welfare is dependent on income, and that the individual knows how trade policy affects his income. They expect that those whose income suffers as a result of more open trade will oppose freer trade policy. They largely focus on the Heckscher-Ohlin (HO) framework of factor mobility where workers can move costlessly from sector to sector and across industries. Thus wages differ not by industry but by type of worker. They posit that this model better reflect long term horizons as compared with the Ricardo-Viner (RV) framework whereby workers cannot move across all industries, so wage differences are due to type of work rather than type of worker.

 They run empirical models to test the hypotheses they derive from the model, which is that those less skilled workers will be more opposed to trade liberalization than highly-skilled workers. Their data analysis confirms this. It also seems to suggest that the type of industry that employs a worker is not particularly relevant in predicting if he will be anti-free trade measures. Other important variables prove to be race (in certain circumstances), membership of a union and political awareness. However, these variables do not significantly alter the coefficients of the skills variable. Surprisingly political affiliation is not significant in predicting if a person will be against free trade policy.

Theory

• Trade policy affects factor incomes by changing a country’s product prices.
• An industry enjoying a rise in product price post liberalisation will earn +ve profits, and if product price is falling the reverse is true. Optimising firms earning +ve profits increase production so economy wide demand for different types of labour changes i.e. demand for labour in expanding sectors will rise relatively. For equilibrium to be restored the wages of the two industries must adjust. 
• The HO model says that trade protection is extended to sectors that employ factors of production in which the country is relatively poorly endowed as these are the workers who lose income in the move from autarky to free trade. So the types of workers who are abundant support free trade, and those that are scarce support protectionism. E.g. US tariffs were higher in less skill intensive industries in 70s and 80s (as they have a greater proportion of skilled workers). 
• The RV model says income is linked to sector of employment not the type of worker. So sectors whose prices fall post free trade (ones with comparative disadvantage) realize income loss for their workers, and thus they are opposed to free trade. i.e. those workers who work in protected industries should oppose trade liberalisation. 
• Trade policy affects regional economic performance, and so if it acts to shrink industries with less comparative advantage, then areas with a lot of such industries will see demand for housing fall and thus housing prices fall. So in areas with a greater concentration of activity in sectors with weak comparative advantage, homeowners will tend to oppose free trade.

 

Data Analysis

They do statistical analysis of National Election Studies surveys of samples of the US population. I will not describe the data nor the regressions, just summarise the findings reported.

 There is little statistical evidence to suggest that the person’s industry of employment influences policy preferences. This counters the RV model.

• However, the coefficients on the skills variable (measured in terms of years of education) is significant and means that if you take a high school dropout and give them a full education they are 25% more likely to be in favour of free trade. So, in support of the HO model, it is the individual’s skill level that matters most for probability  of supporting free trade measures. This indicates that intersectoral labour mobility is high in the US over the time horizons in which people are evaluating trade policy.
• They perform a robustness check by including other variables, such as political party identification, ideology, race, gender etc. and find that the coefficients in the skills variable is not significantly affected. However the check reveals that there is another important variables as trade union membership appears to be a determinant of opinions regarding free trade. Also, a small effect is found in those supporting environmental causes in being against free trade.
• They also conclude that political awareness is a factor. Those who are more attentive an knowledgeable about politics are less likely to support new trade restrictions.
• The confirm their hypothesis regarding home ownership.

DISTRIBUTIONAL COALITIONS AND THE POLITICS OF ECONOMIC REFORM

DISTRIBUTIONAL COALITIONS AND THE POLITICS OF ECONOMIC REFORM IN LATIN AMERICA

H.E. Schamis

World Politics 51.2 (1999) 236-268

 A Summary

In a Nutshell

Traditionally the emphasis when seeking to explain the free market reforms in Latin America has been on how losers were neutralized. This stems from the application of the logic of collective action: the costs of liberalization are great and concentrated on a few key groups (those industrialists who benefitted under ISI in particular), whereas the long run benefits are dispersed throughout the whole nation. This much larger group of beneficiaries is plagued by free riding problems and have little incentive to organize in favour of an open economy. For the small groups the cost of organization outweighs the benefits and so they lobby the state. These distributional coalitions induce the state to be more interventionist than it might otherwise prefer to be.

 Seen thus, for free market reforms to occur, these “losers” must be pacified in order for reform to become a reality. Analysis thus concentrates on top down decision-making (executive isolation) [see Armijo and Faucher], large electoral mandates, external imposition (IFIs) etc. as the key features that made reform possible in Latin America. What this misses is the extent to which there was an empowerment of winners. It is the influence of winners that offsets the capacity for collective action of the losers.

 The distributional coalitions that form behind liberalization are rent-seekers. They benefit from ties between the government and business; from uncompetitive privatization etc. (examples to follow).  It is true that an interventionist state is prone to rent-seeking behaviour, as the state has the power to grant entry into industries which exhibit profits greater than the opportunity cost. However, what was not previously appreciated was that liberalization policies also can generate incentives for rent-seeking, and indeed the success of the very reforms themselves was underpinned by this rent-seeking which allowed politicians to orchestrate distributional coalitions for change: empowering the winners. What is so novel about this approach is that in effect we are not talking about groups organizing to capture the state in order to intervene to distribute, but rather groups organizing to induce the state to withdraw from economic policy making.

 Some examples

Chile

• Key policymakers of the Pinochet government served on the boards of large firms and economic conglomerates before and after holding central bank and cabinet posts leading to collusion between economic and political power. Monopolies were built as state firms were privatized, and the benefits of collusion were beneficial policies that allowed the firms to extract rents.

 Argentina

• Once Menem converted to liberalism he had to get big business son board who would suffer from the loss of protections afforded under ISI. Menem offered many positions within government to the bosses of the big conglomerates so policy was in a sense negotiated with business.
• With the passing of the State Reform Law virtually every state owned company was eligible for sale, and privatization became one of the key means of coalition building. Monopolies were sold off unbroken up, i.e. with monopoly rights intact, and sold at very favourable prices. Domestic capital was given excellent opportunity for investment and as such there was a large degree of horizontal diversification as domestic capitalists invested in a number of large monopoly ventures usually with foreign banks leading the way.

IDEOLOGICAL PERIODS IN POLITICAL ECONOMY

IDEOLOGICAL PERIODS IN POLITICAL ECONOMY

A. Hira

Chapter 2 and Conclusion from Ideas and Economic Policy in Latin America

 In a Nutshell

Ideas are important.

Traditional interpretation of the neo-liberal reforms in LA miss the fact that the political economies of Brazil and Venezuela are very different but the tried the same reforms. Moreover, despite the heterogeneity of system and history within the states of Latin America, whether it be the period of inter-war globalization, post was import substitution or late 20^th Century liberalization, the region has moved often in a similar direction. Thus to focus only on international actors or domestic conditions etc. is to miss the importance of the power of ideas. Criteria such as the was the relationship between a state and the world economy is viewed informed distinct orientations toward development that are signs of different ideological perspectives. It is the dynamic creations to the answers of development issues that constitute the discourse on development.

Whilst it is true to say that dominant coalitions select policy to suit themselves, the menu of economic policies available is derived from the economic ideological frameworks that are available at a particular time in history. Paradigms of development represent pools of ideas that delimit policy choices. These ideologies are worked into the state apparatus by knowledge networks which during the time of interest consisted of expert technocrats (previously the knowledge networks were driven by ECLAC and then the Chicago boys].

Crisis is an important feature of this type of analysis. This is because paradigms change as anomalies accumulate (i.e. something that cannot be explained by the current paradigm). When the accumulation of anomalies reaches a crisis limit a new paradigm must come to dominate. Thus a crisis is an acclaimed failure of the current framework of economic policies to achieve their stated goals. Whilst not the only way to change an ideology, it is one of the most fundamental instigators of change. [This would place a greater emphasis on crisis than Armijo & Faucher allow for. In other words it was not until ISI was thoroughly discredited that a new paradigm fed by expertise from USA and Britain etc. could come to dominate. Without the hegemony of that idea, the selection of neo-liberal policies would not have been possible, as policy makers can only select policy from a menu which contains those policies available under the dominant ideologies.] It should be noted that international pressures and domestic coalitions are still need to pressure for change and support it, and particularly important are the reverberations between the two, but an active ideology is also essential. The ideology legitimizes.

A hegemony of ideas breeds stability in policy making. First ECLAC then the Washington Consensus. It is this stability that is essential for growth. [It could then be argued that the failure of ISI and the crisis of the 1980s, international and exogenous conditions aside, could be partly attributed to a faltering ideology, which led to instability of policy. The actions necessary to complete the ISI model such as regional integration faltered as there was a lack of political will both because the ideology was not strong enough now, coming out of ECLA, and secondly that the B-A did not have at their core the same ideology as the previously populist regimes.]

[This is important for evaluating the Engerman and Sokoloff thesis (EH451) and also the AJR thesis:  Doctrinal and ideological changes and their effects on growth are also not understandable in the light of the institutional hypothesis. Although doctrine and ideology are doubtless formed against a backdrop of institutions there is a wealth of other factors – social, economic, international, that shape them as they in turn shape policy, institutions, incentives and thus growth. From the importance of Comte in the positivist strains of thought at the turn of the 20^th Century[1] to the extraordinary influence of Raul Prebisch, Latin American politics and policy specifically related to growth and development has often been dominated by thinkers that exist outside of its own institutional makeup. Furthermore an institutional focus does not recognise the social causes of populism such as rapid urbanization, an increasingly “mass society”, plus the electoral gains to be made (in certain periods of history) from nationalism in casting foreign investment/involvement in a malicious light.[2] It therefore cannot explain the cyclical nature of Latin America’s dalliances into large scale redistributionary politics. A similar story can be told in relation to the apparent cycles of authoritarianism. What we see in Latin America are periods of large doctrinal and ideological changes and these change economic outcomes in ways that endowments cannot predict.[3] We see this even in the modern history of the region: the shift toward liberalization as doctrine and the consequent effects on growth in the 1980s was caused in part by debt crisis, external pressures and trends in thought, and internal political pressures as part of the transition to democracy.[4] The institutions of private property and the more wide institutions of the market surely were important in seeking to redress the allocative inefficiencies of the structuralist period, but they are again only part of the story. Therefore the ES and AJR hypotheses are not sufficiently sensitive to such ideological contexts and their causes.]

---

[1] Hale Political Ideas and Ideologies in Latin America, 1870-193  in L. Bethell (ed.) Ideas and Ideologies in Twentieth Century Latin America (1996)

[2] Dix Populism: Authoritarian and Democratic Latin American Research Review XX 2 (1985) pp.29-52

[3] North, Summerhill and Weingast Order, Disorder and Economic Change: Latin America vs. North America

[4] Astorga, Berges and Fitzgerald, The Standard of Living in Latin America During the Twentieth Century, Economic History Review, LVIII, 4 (2005), pp. 765–796

“WE HAVE A CONSENSUS”

“WE HAVE A CONSENSUS”: EXPLAINING POLITICAL SUPPORT FOR MARKET REFORMS IN LATIN AMERICA

L.E. Armijo & P. Faucher

Latin American Politics and Society, Vol. 44 No.2 (Summer, 2002) pp.1-40

A Summary

 In a Nutshell

It was previously thought that free-market reform in Latin America would not be successful due to the vested interests that benefited under the ISI system that were sure to oppose any reform that weakened their position. Political actors would not find a reform strategy viable as much of their support base had benefitted from ISI, and collective action theory indicates that such concentrated benefits are easier to defend than the on aggregate greater benefits that would in essence accrue to the whole population. Given that the reforms occurred in a time of “re-democratization” [although on this one should read carefully the O’Donnell analysis of Delegative Democracy] in which sensitivity to the median voter (most likely living in a state of poverty), then it is surprising that the neo-liberal agenda which supposedly favours capital over labour, and multinationals over local firms came to be implemented. Why did this happen?

  In trying to account for the support for neo-liberal reform in Latin America, the authors place most emphasis on

1. The changing identities and attitudes of the elites, businesses, and other interest groups. Identities changed generally by the deconstruction of the unionized labour movement, and by the new powers that emerged as winners from the free-market policies. The attitudes and preferences of existing elites changed to support neo-liberalism because of a sense that reform was inevitable, and at that stage it is rational to accept reform but try to win concessions. More importantly the, was the political bargaining and coalition building undertaken by the leaders in order to build support for the reforms. This took the form of offering concessions to certain interest groups, favourable pricing when privatizing and other such forms of quasi-patronage. [This is similar to the Schamis argument.]
2. A change in the preferences of the public. They argue that such radical reforms could not have been undertaken without at least the tacit consent of the populace, given that they occurred in a period of democracy. This type of support is somewhat harder to explain, although they suggest that the benefits from an end to inflation and macroeconomic instability have tangible benefits especially for the poor who are otherwise unable to insulate themselves from the detrimental effects associated with those problems. [An additional thesis particularly relevant for explaining support for more open trade is provided by A. Baker who suggests a consumption based theory of support whereby people prefer the lower consumption costs associated with free market economics, even if the open international competition in effect reduces jobs at home and causes de-industrialization. This is because the links between the open economy and unemployment are not as easily discernible as the links between trade and lower prices.]

 In so stressing these two factors are key, they are arguing against theses that try to explain to free market reform based upon the assumption that reforms were domestically unpopular with both the elites and the populace. The three most important of these are, the  crisis thesis, the external assistance thesis, and the executive isolation thesis. The main takeaway then, is that political exclusion is not necessary for market reform, and such reform does not run against democratic traditions.

  Crisis

Economic crisis stimulates efforts by political leaders and makes citizens willing to endure transition pain. During crisis people are willing to put up with policies they otherwise would not accept, and as things get worse people are willing to take bigger risks to solve the problem [Weyland].

However, although the index of reform constructed which shows a convergence in level of reform between Mex, Arg, Braz and Chile such that only 8% of the reform scale differed from most reforming to least, the level of crisis between those states was somewhat different. Chile was less crisis prone. More importantly there does not seem to be a strong correlation between the timing of the crisis and the implementation of the reforms [important point for criticising Weyland]. Chile was an early reformer in the 70s, but it is not clear that at that stage, Chile was any worse off than Mexico which suffered close to a decade of forex shortage before the 1982 crisis.

They conclude that whilst a helpful condition is probably not necessary and certainly not sufficient. [In terms of an ideational interpretation it seems that crisis is often necessary to discredit the old ideology and usher in a new ideology which informs the choices available to policy makers. See Anil Hira piece summarized this week.]

 External Assistance

Governments that receive a lot of overseas aid/assistance/capital can use the funds to help ease transition pain of neo-liberalism thus making reform more feasible. This is very much linked to the types of pressure from conditionality imposed by the IFIs.

The authors argue that actually the countries studied were relatively immune to pressure from Washington, especially Mexico given its special relationship with the US. They all had fairly well developed industrial bargaining levers they could pull such that reform would only be enacted at their insistence. This confirms the view that the most successful and wide reaching reforms were actually undertaken under home initiative away from IFI influence.

 Executive Isolation

This includes that idea that if elected with a strong mandate the president can act as he chooses. More generally the logic is that if the president and his technocrats are shielded from the day-to-day demands of political actors (including voters), then reform has a better chance of being implemented. The problems of collective action highlighted above will be solved if the president is isolated from the demands of strong interest groups.

The view is founded on analysis prevalent during the rise of the East Asian Tigers, that posited that benevolent dictators are enable superior economic outcomes.

However, during the 70s all four countries were under authoritarian regimes, and only Chile chose to go with reform. Additionally there was huge variation between the size of the mandates given to the presidents of the newly democratic nations. Moreover, even where mandate was large, they were often not elected on a platform of neoliberalism (Menem, Fujimori).

Centralization of decision-making, often a key feature of the isolation hypothesis was only an aspect of the polities of Mexico and Chile, not Arg and Braz which have strong traditions of federalism. Chile and Mexico were also able to overcome problems of excessive veto players, and checks and balances as they were more authoritarian in nature. Brazil and Arg were not so, and yet there was convergence of the levels of reform. Clearly the isolation thesis is somewhat lacking.

 Pro-reform Shift in Elite Preferences

Isolation is not enough to ensure survival. Political systems depend upon support from a relevant set of political actors the identity of who will shift given different types of regime. Thus the coalition that sustained ISI needed to change to sustain neo-liberalism.

Once reform was initiated the identities of the elites changed, as due to openness and financial integration with the world economy there was greater influence for external investors and for domestic capital. Moreover, recession had weakened the labour movement.

There was also a shift in preferences of the elites. They may have feared losses from a continuation of the ISI model which seemed discredited. There may have been a bandwagon effect whereby they recognised that reform was going to happen regardless, so it was better to try to carve out concessions and favours from the government.

 Bargaining was also extremely important:

 Chile

Stabilization was painful but compensated for by state investment through CORFO to provide incentives to non-traditional exporters. Certain business owners also received tax rebates; export subsidises, and import protection. There was subsidized credit for investors wishing to invest in the newly privatized state companies.

 Mexico

The government tried coalition building. They linked trade opening to a strategy for reducing inflation. This and other government-business pacts also proved pivotal in mobilizing support for reform.

In Mexico there was a significant effect of reform from the top. Labour and business was often excluded from negotiating the specifics of reform. This was reinforced by the pre-eminence of the PRI. Thus Mexico missed much of the countervailing political pressure. Whilst this fact was expedient for reform, it was not sufficient.

 Argentina

Argentine reform also seems quite centralized. Menem performed a complete volte-face, and the State Reform laws gave him power to privatize and make policy by decree. This looks like insulation.

Yet the specifics of reform reveal a large amount of coalition building. Capital could participate on favourable terms in privatization, side payments were made to existing elites. The financial sector was won over by promises of the management of the previously state help pension and social security funds.

 Brazil

Had the least executive isolation, and the most political bargaining.

The plan that eventually worked the Plan Real, was negotiated fully in advance within a distinctly political framework. Partial trade exemptions were allowed, and privatization occurred at a slow pace.

The political bargaining may have been even more important as the crisis etc. was not of the same magnitude as in the other states.